FICO Credit Scores & Their Impact On California Real Estate
A new FICO credit scoring system is rolling out. How is it different? How will it impact California real estate, and those engaged in it? August 2014 saw a huge media fanfare over the roll-out of FICO score 9. However, some pundits are already questioning whether it will have any positive impact for home buyers. So what’s new? Who will it impact? Why are they changing your credit score, and what will it mean for California real estate agents and investors? FICO 9 The new formula for FICO score 9 is mainly aimed at squashing claims by the U.S. Consumer Financial Protection Bureau (CFPB) that individuals with medical debt where being unfairly treated and scored. The main change with FICO 9 means dropping collection accounts, regardless of whether they were paid in full or settled. An Attorney at the National Consumer Law Center said this was great news, as “about half the negatives on consumers’ credit reports are from medical debt.” Some have anticipated that this could boost the average credit score by around 25 points. However, this will also tip score penalties against those with other non-medical collection accounts. That could automatically drop the scores of many other individuals, and neutralize any benefit of medical collections, which most mortgage lenders haven’t traditionally cared about anyway. FICO 9 has already graced the front pages of the Wall St. Journal, and has been promoted on TV. The president of the National Association of Realtors (NAR) has raved about it, saying it will change the lives of millions of American homeowners and buyers that have been barred from the market, or have been trapped paying higher interest rates. Others aren’t so bullish. Some have pointed out that other credit bureaus and reporting agencies have made different changes to their scoring formulas. However, the biggest issue appears to be whether anyone will actually use FICO 9. There is apparently no word on the largest financial institutions, Fannie Mae, Freddie Mac, or Wells Fargo planning to use it. Borrowers need to know which scores and scoring systems their mortgage lenders will be using in advance and plan for it. In Testing In reality, this isn’t really different to the process any other credit scoring model has gone through. Many don’t realize how frequently these updates occur. FICO 8 came out in 2008, yet is still only reportedly being used by 2,700 lenders and Citi for credit cards. Lenders like to see how these scoring models actually work against real performance in their portfolios, and they should. However, it is clear that changes are needed to factor in recent major swings in the economy, housing market, and the nation’s credit scores. This can balance out what lenders haven’t been able to do on their end in loosening underwriting, yet. What’s Really Behind These Changes? Changes may be due to: What FICO 9 Means for California Home Buyers While it is impossible to tell exactly how soon mortgage lenders will begin using FICO 9, there are obvious ways for hopeful home buyers to start working on improving their scores. Instead of worrying about paying off medical bills, they may choose to prioritize paying off other types of collection accounts. What’s great is that they shouldn’t be penalized for negotiating and settling with companies. Most will accept installment payment agreements, and some have settled for pennies on the dollar before. It will be really interesting to see the effect on those that have gone through short sales, or have negotiated short pay offs on other housing related debt. Theoretically, they could be much better off under the new system. In conjunction with the loosening of access to credit by various lenders and under new home loan and assistance programs, it could be easier and more attractive to buy a home in California. The same applies for those looking for a home to rent in California too. What FICO 9 Means for Creditors For mortgage brokers and loan officers, this trend suggests they should hold onto borderline leads tightly and keep them in the loop. Many recently denied buyers and homeowners looking for a refinance may soon qualify under the new system. Private landlords, sellers and mortgage lenders should also keep this in mind when reviewing credit reports. Perhaps they should be a little more lenient, and stop sweating some factors as much as they have. Remember that continued loosening and demand for mortgage debt will make paper even more valuable in the near future. For California Real Estate Investors This is all positive news for California real estate investors. It may even suggest that more activity is on its way, and it could become even easier to buy and sell property in the future.